 Business Income 2022-2023, Business Income or Loss and Other Gains or Losses, Tax Software Examples. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040, populating it with Lesser Tax Software. You don't need tax software to follow along, but if you have access to it, it's a great tool to run scenarios with. You can also get access to the Form 1040 related schedules and forms at the IRS website irs.gov, irs.gov, starting point as normal single filer Mr. Anderson, no dependence, 100,000 W2 income. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. We've got the 12,950 standard deduction bringing us to the 87,050. If I check that out in our formula over here, 100,000, 12,950, 87,050. The tax is being calculated depending on the software and we are dependent on the software to calculate the tax is what I mean 14774. We're saying there's 15,000 of withholdings to get us down to the overpayment of 226 mirrored over here as well. Now I just want we're going to do a quick look then at what would happen if our income was coming from a Schedule C type of business. So right here we've got our income obviously on the W2 side of things. What if it was business income? Now as we look at this we want to just get an idea of the added complexity involved with a business income. And remember if you're doing tax return preparation, then you might be thinking, where do I want to specialize? Do I want to be picking up a lot of businesses or do maybe I want to be doing non-business tax returns and not take on a lot of the added complexities that might come with business type of tax returns? Where do we want to be specializing within? So our main focus here is on the income side of things. So if I open up the Schedule 1, we could see that we're going to have these other income items and we're looking here at the business income coming from the Schedule C. This will feed into Page 1 as we've seen before with the Schedule 1 that will be feeding into this Page 1. But as we do that, we're also going to see a lot of other items that are impacted when we add the Schedule C income. So let's just add a simple Schedule C and look at some of those changes that will take place. So I'm going to go to income. I'm going to say it's a Schedule C business. This is where we would add a whole another income statement. I'm not going to add anything except some income line and an expense line. So let's say there was 30,000 of income and then we had advertised an expense of 10,000 to bring us down to 20,000 basically net of this little income statement. So if I say, okay, what would happen if I pull that on over to the Form 1040 and we say, okay, now I've got a Schedule C. So I haven't populated it in terms of all the stuff up top. We'll talk more about that later. But the general idea is that we've got an income statement down below, income 30,000 minus the expense of 10,000. That's going to give us a net income in essence of the 20,000. And that's what's going to pull into the Schedule 1. So now in the Schedule 1, we've got the 20,000 and there it is in that 20,000 is then going to pull into the Form 1040 where we have the 100,000 and then the Schedule 1 stuff of the 20,000 to get us to 120,000. So not too complex. We would expect that's kind of what we would expect to see at that point. But if I go back to the Schedule C, remember that really what pulled over wasn't actually just the income line. If I look at my income tax equation, we kind of think about income, you know, everything that's income up top and then the equivalent of expenses down below being deductions to get to the equivalent of taxable or net income, which is taxable income. But here we have all these expenses that are really being recorded, which are deductions on the Schedule C. So these are business deductions that are being recorded. And what's being pulled into our tax formula, is it really income, gross income? It's the net income that's coming from our Schedule C. Now, obviously in order to populate the Schedule C, we need an basically an income statement. So that means we need some level of bookkeeping. So if you do taxes, then the question is, are you specializing and are you going to help out with bookkeeping or adjusting kind of entries if you're going to be helping out and populating the Schedule C, which oftentimes small businesses could use some help in that department. Also, if they give you an income statement, then this isn't exactly using the double entry accounting system because there's no balance sheet. So in order to get a better grasp on this, it would be better to have the businesses using something like a QuickBooks that uses a double entry accounting system and populates a balance sheet and whatnot, so that you can have more assurance on this income statement that's being used to populate the Schedule C. So those are just a couple added complexities with regards to the Schedule C income. Also note that if you had Schedule C income and no business income, no W2 income, then you'd also have to be thinking about how they're going to pay their taxes as the year goes, meaning they would have had to pay in 2022, not by April 15th or 18th of 2023 to avoid penalties and interest. So you have that added level of complexity to deal with. And then you also have the self-employment tax. So we'll go into this in more detail later, but just to see the added kind of complexity. If I go into the self-employment tax, this is the equivalent of payroll taxes that come out of your W2. However, there are an employee and employer portion. When you work as an employee, you only pay through the W2, the employee portion, the employer pays like the equivalent in terms of social security and Medicare. So the IRS kind of sees you as a sole proprietor as the employee and employer of yourself with regards to social security and Medicare. So they basically charge you the employee and employer portion of social security and Medicare taxes on your net income, in essence. So we'll get into this in more detail later, but the general idea. Sorry about that. I almost choked to death there, but that's okay. I'm back. The general idea is that you've got your tax calculation down here, which is going to be pulled into page two. Now, this is more complicated, obviously, because usually we don't have to deal with like payroll taxes, social security and Medicare with a W2 type of client, because although it's reported on the W2, it usually has already been taken care of by the employer, and it's just a reporting form. And we're dealing with the income tax, not these other taxes, but here we'd have to deal with that. So if I go back to the form 1040 and I go to page two, you'll notice that we have the tax calculated calculation, but we also have these other taxes of that 2008-26. Not only that, but if I go back to that form, we also going to take half of that amount, and that's going to be a deductible portion. Why is it deductible? Because whenever they deal with the Schedule C, they're trying to kind of use this schedule to mirror what happens in payroll taxes. And if you had an employee-employer situation, the employer would have to pay their portion of the payroll taxes, but they would also get to deduct that portion. So you would think that this amount that I have to pay in payroll taxes, I would get to deduct it, which you would think would happen on the Schedule C. But I can't deduct it on the Schedule C, because the net income of the Schedule C is the thing I use to calculate the payroll taxes, and that would end up in a circular reference. Therefore, we have to deduct that as an above-the-line deduction over here on the Schedule 1. So now we've got the Schedule 1 deduction for the half of it that's included in here. And then I had the self-employed health insurance. That's another kind of complication, but I'm not going to include that now. Then this is going to be included down here, and that pulls into Page 1. So now if I go through this, I still got the 100,000 W2 income, 20,000 of the net income pulled in from the Schedule C. That makes sense for the total income of 120,000. But then I've got this messy above-the-line deduction of half of the self-employment tax of 1,013 to get me to the adjusted gross income here. And then we also have this qualified business income deduction, which is a relatively new deduction, which again is coming from this situation where they're trying to mirror what they did with some of the pass-through entities, like a Schedule S corporation and an LLC in the format of a sole proprietorship. And they just kind of clumped this qualified business income deduction in place here. So we might talk about that calculation a little bit more later. It has some kind of wonky, weird components to it, but obviously it's a significant amount. And so then, and that finally gets us down to the taxable income. So if I was to mirror that and just try to say, okay, what happened here? What happened here? I would say, okay, well, the income, if I go to the income line, I can recalculate the income statement, which you might not do in your little worksheet over here, because you might have another worksheet that basically is the income statement. And we'll talk maybe more about that later. But if I say this was, what did I say? It was 30. I said it was, how much did I say it was? I don't know. Let's say 30,000 minus 10,000. That's 300 minus 10,000 gets us to the 20,000. That's going to pull over here. So now we're at 120,000. And then we've got the adjustments to income, which is going to be the tax. So it's self employment tax. We could recalculate it, but I'm not going to do that right now. I'm just going to rely on the software to calculate the tax, which is going to be the 2826. Let's actually do the tax first. That's going to be other taxes, self employment tax to eight to six. And then the above the line deduction is going to be equal to that 2826 time are divided by two. And so that pulls into page one, I could recreate this and say, okay, there's the 120 minus half the self employment tax is 118 587. Does that make sense? Does that make sense? I don't know. So 118 587. All right. And then we've got the standard deduction. Boom. And then you've got this qualified business income. Now we could have another worksheet to calculate that to kind of double check that, but I'm just going to rely on the software right now and say, okay, the software is coming up with 3717. So I'm going to say, all right, so 3717. So we might dive into that later when we get into the schedule. See, but the bottom line is here at this point, 101 920. So now we're at the 101 920. And then if I go to page two, I'll rely on the tax software to calculate the income tax 18296. So this is going to be 18296. And then the the other credits, we don't have any, but we got the other tax, which is the self employment tax, which brings our total tax 18 plus the 2826 to 21122. We withheld 15,000. So therefore the amount due is 6,000. The software calculated a penalty of 161. So I'll say 161 on the penalty gets us the two, the 6283. So 6283. Okay, that's just a quick recap of all the things that are kind of impacted. So they are main focus right here is just on that, that amount that's being pulled in from the schedule. See, because we're focused on line one and the income line, but obviously all these things become interrelated. And part of the difficulty on the tax code isn't that any one thing is difficult, but it's when you compile all these things together and they have interrelated reactions such as AGI limitations and so on and so forth, that that it starts to be complex just because of those interrelationships. And again, the schedule C, although you can have a fairly basic schedule C, it still could add a significant level of complexity to the tax return. As you could see, it can have an impact on many different kind of areas. Now if you're sold business equipment, then that's when you might have that form 4797. So I don't think I'm going to dive into that right now. But other than to say other than to say here is the form sale of business property. And when you're when you're looking at a business, this kind of comes down to the bookkeeping situation again, because when they make large purchases capital investments, then you typically have to put them on the books as an asset. That means you have to also deal with depreciation schedules. And when they sell assets, then now you've got a situation where you've got a sale of business asset, we've got to kind of figure out the gain or loss on the sale of the business asset. One other thing to just touch on, which we'll talk more about later, we said that we could have a gain or loss. So remember that this like, what if I started a business and it lost money? If I went back on over and I said, okay, what if my schedule C business here lost money, lost money? I'm going to say, okay, let's say the expenses were actually 40,000. So we lost $10,000. So if I go back on over schedule C, income minus expenses will expenses are greater than the income I have a loss. Can you do that? First of all, our loss is good or bad. In reality, they're bad. We are business lost money, although that often happens for startup businesses. And if the investment results in revenue in the future, that could be good, but many businesses end up losses and businesses go under and that happens. But for taxes, it could be good because we might be able to pull the loss over. And if we had W2 income, for example, we maybe can take the loss against the income, bringing our W2 income down by the loss now to the 90,000 from the 100,000. Now the IRS is going to be quite skeptical as you could expect with people claiming losses on the schedule C. So you've got to make sure that you actually have a valid and justifiable loss. You're not talking about a hobby that you have that you're writing off as a loss as a business or something like that. And that it's an actual calculation of the loss. So we'll dive into that possibly when we get into the schedule C area. But just note that that could happen quite possible, that you have a business, started a business, the business had a loss and you could have a tax benefit from a loss. But again, the IRS, you can imagine, is going to be more skeptical. You would think if you were an auditor and someone's writing off losses, you're going to go, I don't know about, you know, you might, you know, dive into that in a bit more detail. So like I say, we'll talk more about schedule C stuff in a future section.